The FX MarketThe Foreign Exchange market which is often referred to as the "Forex" or "FX markets" is the largest, most liquid, most transparent financial market in the world. Daily average turnover has now exceeded 2 trillion USD. All the U.S. equity markets combined do not reach 3% of the total volume traded on the FX market.Unlike other financial markets, where for the most part you can only profit in rising markets, in the FX market whenever one enters into a position he is long (bought) one currency and short (sold) another currency simultaneously which means as opposed to other cyclical financial markets in the FX markets there are endless opportunities.
Basic ConceptsThe term Foreign Exchange means the transferring of one currency into another simultaneously. Since currencies are traded in pairs, to profit from an exchange rate move you need to buy the currency that you expect will strengthen and sell the other. For example if you believed that the Euro (EUR) was going to appreciate against the dollar (USD) you would buy the EUR/USD; or in other words buy the EUR and sell the USD. Alternatively, if you believed that the EUR was going to depreciate against the USD then you would sell the EUR/USD; or sell the EUR and buy the USD.As can be seen there is no need to wait for a bullish market to profit, for at any given moment, one currency will be strengthening against another. The FX market is therefore constantly producing opportunities to invest.
Who Trades in the FX Market?Foreign exchange traders can be separated into two groups, hedgers and speculators.Hedgers: Governments, companies (exporters and importers) and some investors have foreign exchange exposure. Adverse movements between their local or domestic currency and the foreign currency of the group they are either doing business with (for the exchange of goods and services) or investing in will affect their bottom line. This is the core of all foreign exchange trading; however it only makes up approximately 5% of the actual market.Speculators: These groups which range from banks, funds, corporations and individuals – create artificial rate exposure in order to profit from the variations or movements in the price.
Currency PairsCurrency Pairs: Each currency is recognized by a three letter code. For example EUR (is the EURO and refers to the European currency), USD (is the United States Dollar). The worlds leading currencies (often referred to as the majors) are the EUR, USD, JPY (Japanese Yen), GBP (the British Pound or Sterling), CHF (the Swiss franc), AUD (the Australian Dollar) and the CAD (the Canadian Dollar).Currencies are traded in pairs and are displayed as such. There is always the three letter currency code a slash and another three letter currency code. The first currency displayed refers to the "base", "leading" or "primary currency"; the second currency refers to the "secondary currency".
Calculating your P&LAs discussed above the foreign exchange rate represents the value of one unit in the major currency in the terms of a secondary currency. Since when opening a trade you exercise the trade in a set amount of the major currency and when closing the trade you do so in the same amount, the profit or loss generated by the round trip (open and close) trade will be in the secondary currency.
Orders – O.C.O's, I/D's and Trailing StopsAs mentioned above there are many combinations of orders that are possible to you in the FX market and in the AvaTrader platform. Stop and Limit orders as described above are the basic orders available, all the rest are simply a combination of them or contingent orders.
Trailing StopsA Trailing Stop is an active stop loss that keeps a set distance away Hedging TradesOn the AvaTrader platform, traders have the opportunity to hedge their positions. A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same affect. Some traders enjoy this feature and capability to hedge an open trade rather then close it out as part of their trading strategy. It should be noted that a hedge has the same affect as closing or partially closing an existing trade except for the fact that both the long and the short positions remain in the open positions table, are treated as open trades and must be closed at a later date.
RolloversOn the AvaTrader platform all open positions are automatically rolled or swapped to the next business day. Traditionally all spot trades in the FX market are performed for a period of two working days when the delivery of the transaction is to take place. Since Ava through its AvaTrader platform does not permit delivery trades all trades must eventually be closed. Hence in order to avoid the delivery of the trade, the positions are automatically closed for the original trade date and reopened for the next trade date. In order to keep things simple and give a maximum advantage to its clients the open and close rates of the roll are kept the same as the open position rate. A premium is then either added or subtracted based on the interest rate differential between the two currencies being traded.This is a very beneficial and time saving method to continue the trade on the traders behalf until such time as the trader decides to close the trade.